Renting and service tax

In Budget 2010, the Government used its Brahmastra and amended the Finance Act, 1994, levying service tax on renting of property. To ensure that the weapon was truly effective, the levy was made retrospective, with effect from June 1, 2007.

This measure was to counter the opinion — given twice — of the Delhi High Court, in Home Solution Retail, that the pure act of renting wouldn't amount to a taxable service, since there is no value-addition involved.

It also sent signals to the Supreme Court, before whom a petition on that issue was pending, that the power of the Government to levy a tax under the Constitution is extremely wide. A bevy of petitions before the Mumbai High Court were disposed off recently, disagreeing with the opinion of the Delhi High Court.

MUMBAI HIGH COURT DECISION

In Retailers Association of India Vs Union of India and Ors, the Mumbai High Court reconsidered the constitutional validity of a service tax on rentals.

It noticed that the Supreme Court had an occasion to consider similar petitions in four landmark cases against the Union of India — Tamil Nadu Kalyana Mandapam, Gujarat Ambuja Cement, All India Federation of Tax Practitioners and Association of Leasing and Financial Services Companies. Considering a plethora of other Apex Court decisions, the Mumbai High Court held that the legislative basis that has been adopted by the Parliament in subjecting taxable services involved in the renting of property to the charge of service tax cannot be questioned.

The assumption by a legislative body, that an element of service is involved in the renting of immovable property is certainly not an assumption which can be regarded by the Court as being so manifestly perverse as to lead to an inference that the Parliament had treated as a service, an item which in no rational sense could be regarded as involving service.

But more significantly, even if the Court were to proceed on the basis, suggested by the petitioners, that no element of service is involved, that would not make the legislation beyond the legislative competence of Parliament.

As long as the legislation doesn't trench upon a field which has been reserved to the State legislatures, the only conclusion that can be drawn is that the law must be treated as valid and within the purview of the field set apart for Parliament.

The petitioners were also irked by the retrospective application of the law. The Mumbai High Court was of the opinion that Parliament has the plenary power to enact legislation on the fields, which are set out in List I and List III of the Seventh Schedule.

RETROSPECTIVE APPLICATION

The plenary power of Parliament to legislate can extend to enacting legislation both with prospective and with retrospective effect. That, however, is subject to the mandate of Article 14 of the Constitution, which states that the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

The Mumbai High Court agreed with the decision of the Supreme Court held in Bakhtawar Trust Vs M. D. Narayan, wherein it was held that it is open to the legislature to alter the law retrospectively, provided the alteration is made in such a manner that it would be no more possible for the Court to arrive at the same verdict.

BEFORE THE SUPREME COURT

The decision of the Mumbai High Court follows the pattern of a host of High Courts, agreeing to disagree with the logic of the Delhi High Court in Home Solution Retail — the Punjab and Haryana High Court in Shubh Timb Steels, Orissa High Court in Utkal Builders and the Ahmedabad High Court in Cinemax India.

These decisions, along with the fact that renting of immovable property is not in the initial list of negative services, would be food for thought for the Supreme Court.

While all the developments post-Home India point to validating the levy, the Supreme Court could think of constitutional precedents and judicial cases to rule that the tax is applicable only from 2010 onwards, and not 2007.

(The author is a Bangalore-based chartered accountant.)

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